Andy values his leisure at $10 per hour. If he is unemployed, he receives $7 per
ID: 1140812 • Letter: A
Question
Andy values his leisure at $10 per hour. If he is unemployed, he receives $7 per hour in unemployment benefits. If he is hired to work on a public project, he will be paid $18 per hour (and will forfeit his unemployment benefit).
i.) What is the social opportunity cost of an hour of his time (the cost which would be entered in an efficiency benefit-cost analysis)?
ii.) What is the total employment benefit per hour that would be entered in the referent group net benefit account if he was employed on a public project?
iii.) What is the division of the hourly employment benefit between the worker and the government?
Explanation / Answer
i.) The social opportunity cost is equal to the loss of leisure benefits (in terms of money) and the unemployment benefits (given by government) if Andy works on a private project, this is equivalent to:
$10 + $7 = $17
ii.) The net benefits that Andy get while working on the private project:
= Salary per hour - opportunity cost of lost while working on the private project
= $18 - $17 = $1
iii.) The division of hourly employment benefit that is shared between workers and government is $7 which when Andy is unemployed will get from government and if he starts working then the government will save this $7.